How Software Technology Companies Can Optimize Product Costs And Grow Profitability

In this uncertain economy, it is increasingly expensive for software technology companies to obtain external financing to fuel growth. As a result, tech companies face a growth versus profitability conundrum to maintain or grow valuations. Independent software vendors (ISVs) and software-as-a service (SaaS) providers can navigate this complex challenge by leveraging product-focused value-creation initiatives to self-fund growth while also improving profitability.

Utilizing value creation as the lever to support growth requires a holistic approach to optimizing both labor productivity and non-labor costs without diminishing growth potential. In this article, we explore several product-centric value-creation levers that are well-suited to make this a reality.

Product-centric value-creation levers that can self-fund growth

While each lever's ability to generate cost savings or investment capital for growth will vary company to company, the below table directionally represents the opportunities each affords:

* G&A: General & administrative, R&D: Research and development, CoR: Cost of revenue

1. Product portfolio rationalization

Review current product and service offerings and make critical product-life cycle decisions to maximize revenue and ROI, while unlocking R&D, GTM, and customer support capacity and investment capital.

• A thorough review of products value propositions, tiering, and customer segments may uncover overlaps. Combining these insights with customer-product profitability analysis can drive product portfolio rationalization.
• When offering equivalent products across multiple customer segments, leverage product configuration to achieve product tiering instead of creating segment-specific products.
• Leveraging a unified product platform to consolidate acquired products will unlock R&D capacity to focus on growth initiatives and offers a consistent user experience (UX) across products.
• Implement robust product lifecycle management (PLM) processes, educate customers early on product end-of-life (EOL) policies, and enforce them promptly to unlock R&D and support capacity.

2. Supported product(s)' version optimization

Limit the number of supported versions per software product to limit support costs and unlock R&D and customer service capacity to focus on growth initiatives.

• Limit the number of legacy versions supported per product to cut R&D and support needs. A clear upgrade path and incentives will motivate legacy customers to migrate to latest version(s).
• Legacy independent software vendors (ISVs) transitioning to subscription or SaaS models can free up R&D capacity and reduce costs by speeding up the migration from on-premise to SaaS.

3. Digitalized product support and self-help capabilities

Introduce customer self-help capabilities to drive product-led growth and further reduce support costs.

• Introducing self-help capabilities, including AI-driven chatbots for customers within products, enables product-led growth and customer retention while unlocking additional support capacity.

4. New market penetration with existing products

Leverage existing product R&D investments to drive more growth.

• Explore if opportunities exist to enter new markets or customer segments with minimal product modifications. For example, an enterprise or mid-market product can be modified for down-market by enabling multi-tenant deployment models and/or limiting the product feature set. This lever drives both growth and profitability simultaneously.

5. Shared services allocation through activity-based cost accounting

Record product-specific "true usage" of shared services to identify optimization opportunities and unlock capital.

• Allocation of shared services costs is tricky. Many enterprises use simplistic metrics like product revenue to allocate costs, but such metrics do not always reflect the true usage of a shared service at the product level. Activity-based cost accounting can properly detect sub-optimal usage and identify optimization opportunities that preserve and help reallocate investment capital.

6. Product cost structure composition optimization

Diversify deployment costs and optimize third-party costs to unlock investment capital tied up in fixed costs.

• Align cost of revenue (CoR) more closely with revenue by designing SaaS deployment models that come with lower fixed costs., while transforming most deployment costs into variable costs.
• Using cost and market data-driven insights to make build vs. buy vs. leverage open-source decisions can enhance product margins, unlock operating capital, and speed up time-to-market.

7. Product engineering efficiency improvement

Improve the product engineering operating model, software development lifecycle processes, AI-driven automation, and resource utilization to drive additional R&D efficiency with existing resources.

• This topic is probably the most complex, as tools evolve rapidly and new solutions continue coming to market. Adopting agile practices, leveraging AI-driven development tools, and right-sizing are among the top levers to unlock engineering capacity that can be refocused on prioritized growth initiatives. With today's capabilities, the best engineering organizations can achieve almost twice the productivity of only a few years ago, primarily through increased automation but also via more robust internal operating models.
  

Getting started

As new and more powerful AI capabilities further disrupt the tech industry, company strategists are focusing more on product development and less on sales to keep up with the pace of change. Boosting product management, design, and development efforts is critical to succeed in this ever-evolving environment.

At the same time, limited capital availability and high interest rates have created a need for self-funding and a push to optimize cost structures across businesses. These two forces require tech players to develop product engineering capabilities that are both effective and efficient, to ensure they can stay at the forefront of innovation without breaking the bank. Product-centric value-creation levers allow organizations to leapfrog the competition in terms of maturity, capabilities, innovation, cost efficiency, and resource allocation. Companies must discern which levers make the most sense for their specific situations, and enact strategies to pull.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.